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All life insurance policies not created equal

WHAT DO AIRLINE tickets and life insurance premiums have in common? The cost for the identical service can vary all over the map. Two unrelated airline passengers sitting next to each other on the same flight often pay different prices for their tickets. One passenger might pay up to twice as much as the passenger in the next seat. But at least you know the story and can try to win the ticket-price

WHAT DO AIRLINE tickets and life insurance premiums have in common? The cost for the identical service can vary all over the map. Two unrelated airline passengers sitting next to each other on the same flight often pay different prices for their tickets. One passenger might pay up to twice as much as the passenger in the next seat. But at least you know the story and can try to win the ticket-price game the next time you fly.

Can the cost of a life insurance policy fall into the same overpayment trap? Sadly, yes. And almost every time. Either you shop with the help of a competent insurance consultant, or risk overpayment every time you pay a premium.

A recent example of Joe, a 60-yearold reader of this column from the Seattle area, shows the life insurance industry is a member of the variableprice club. Joe needed two kinds of life insurance: single-life (insuring only Joe) and second-to-die (insuring Joe and his wife Mary, age 59).

First, let's look at the price spread. My insurance guru (David Greenspahn of Wilmette, Ill.) sent Joe, with a copy to me, a spreadsheet showing 22 different choices, 11 each for single-life and the same for second-to-die. But, before looking at the big differences, you'll be fascinated by what was the same; all quotes were for $1 million of coverage, universal life policies and from top-rated companies.

I was astounded at the range of quotes. Here they are: single-life for Joe from $14,440 to $21,589 and secondtodie for Joe and Mary from $9,188 to $13,002.

How can you protect yourself? Following is a checklist that should save you thousands of dollars each year, hundreds of thousands or millions over your lifetime (if you carry large amounts of insurance):

With the help of an independent adviser decide on the type of insurance — term, universal life, whole life or other — that would best suit your needs and pocketbook.

Get quotes from at least five insurance companies.

Get quotes from two insurance consultants with each consultant quoting three or more companies.

If you are 50 years or older and married, look at second-to-die.

Only consider quotes from toprated companies. Ask your consultant to give you data concerning each company.

If you have existing policies, about 80% of the time (even though you are older) you will save significant premium dollars by getting an updated quote.

Questions and concerns involving life insurance, about cost and keeping the death benefits tax-free, a topic I discuss below, are the No. 1 reason that readers of this column contact me. And how well I know: This insurance stuff is a tough area to get sound information and advice.

If you have existing life insurance policies, about 80% of the time you will save significant premium dollars by getting an updated quote.

$1 million to charity This is a real-life case study about how to enrich your family, enrich your favorite charity and reduce taxes, all at the same time. Best of all, it's easy to do, and the tax law becomes your friend.

Let's start this case study with the facts: Ben and his wife Mary (both 60 years old) always wanted to give $1 million to their Favorite Charity. They are worth $10 million, including $ 4 million in treasury bonds. Their original thought was to leave the bonds or $1 million, whichever was less, to Favorite Charity after both have died. They are in a 35% income tax bracket and 50% estate tax bracket. (Even if the rates change, the strategies used in this case study remain the same.)

Here's the simple three-step plan we created for Ben and Mary:

Step 1. They gift $245,000 of the bonds (it could be any investment asset, typically an appreciated asset) to Favorite Charity.

Step 2. Favorite Charity buys a $1 million second-to-die single premium life insurance policy covering Ben and Mary for a premium of $245,000. (SPLI is a unique way of paying for life insurance. You pay only one premium when the policy is purchased, and you never pay another premium.)

Step 3. Their income tax savings for the gift to charity are $86,000. They add $85,000 more (a total of $171,000). The entire $171,000 is put into an irrevocable life insurance trust, which buys $700,000 of second-to-die insurance, using an SPLI. Ben and Mary's kids are the beneficiaries of the ILIT.

Let's summarize the economic and tax results after Ben and Mary are gone. To start, Ben and Mary spent a total of $330,000 (the original $245,000 to Favorite Charity, plus the $85,000 added in Step 3). The $86,000 in income tax savings was given to the ILIT, so it's a wash. The kids wind up with $700,000 — tax-free — from the ILIT's policy. A clear profit of $ 360,000 ($700,000 less $330,000).

So, Ben and Mary turned $330,000 into $1.7 million, $1 million to Favorite Charity and $700,000 to the kids, all courtesy of tax-free life insurance and the tax law.

Look back at the facts of this example. Ben and Mary could have increased the amounts to Favorite Charity and their kids up to tenfold by using all or part of those $4 million (only worth $2 million after a 50% estate tax hit) in treasury bonds. And one more point: Ben and Mary can increase (or reduce) the amount going to their family ( or charity) by changing the amounts of SPLI to be bought by Favorite Charity and the ILIT.

Please stop for a moment and let the numbers sink in. This strategy can turn $ 2 million ( after-tax value of the bonds) into about $17 million (all taxes paid). Yes, you can divide the $17 million almost any way you like, between your family and charity. Of course, you should work with the dollar amount of assets that fit your personal situation.